Should We Pay Attention To A Recent CEO Buy At Akamai?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, Dr. Tom Leighton, the CEO of Akamai Technologies (NASDAQ: AKAM), bought 30,000 shares of the company for around $34.75 per share, with a total transaction value of more than $1 million. At the beginning of February, he spent nearly $1.76 million to purchase 50,000 shares of the company. In the past twelve months, Akamai’s stock price has experienced a decline of more than 7%. Should we follow Dr. Tom Leighton into Akamai? Let’s find out.
Akamai, incorporated in 1998, is the content delivery and cloud infrastructure services provider with five main solutions: Terra, Aqua, Sola, Kona and Aura Network Solutions. Terra is used for improving the operation of highly dynamic applications, which are used by companies to connect with customers, suppliers and employees. Aqua is to accelerate business-to-consumer websites with rich and collaborative contents. Sola is used to help customers execute digital media and software distribution strategies. Kona is used extensively for cloud computing security, and Aura is used for network operators to build their own CDN capabilities. In 2012, Akamai generated around 28% of its total revenue from outside of the U.S., while European revenue accounted for around 17% of the total revenue. Akamai has quite a diverse customer base, with no single customer representing more than 10% of its total revenue for the past three years. The company’s customers are all big corporations, such as Adobe, Apple, Audi, Home Depot, Microsoft, MTV Networks, etc.
Consistent growth without any leverage
In the past five years, Akamai has generated a consistently increasing top line and bottom line. Its revenue grew from $791 million in 2008 to $1.37 billion in 2012, while net income gradually rose from $145 million, or $0.79 per share to $204 million, or $1.12 per share, during the same period. What I like about Akamai is its ability to generate consistently growing cash flow. Since 2008, its operating cash flow has increased from $343 million to $530 million, whereas the free cash flow experienced a 6.4% annualized growth to $311 million for the past five years.
Furthermore, Akamai could consistently grow without any leverage. As of December 2012, it had nearly $2.35 billion in total stockholders’ equity, $437 million in cash and no debt. The company also recorded as much as $658 million in marketable securities investments. Thus, the total cash, cash equivalents and unrestricted marketable equities were more than $1 billion combined at the end of 2012.
At around $35 per share, Akamai is worth about $6.2 billion on the stock market. The market values Akamai at nearly 11.5 times EV/EBITDA and 4.5 times sales. Actually, Akamai is a bit cheaper than the ratio indicates. If we adjust its cash and unrestricted marketable securities value of around $1 billion combined, the total enterprise value would be $5.17 billion, valuing Akamai at only 10.2 times EV/EBITDa. Compared to other peers, including Level 3 Communications (NYSE: LVLT) and Limelight Networks (NASDAQ: LLNW), Akamai is the largest and the most expensive company. Level 3, at $21 per share, has a total market cap of $4.6 billion. It is valued at only 8.82 times EV/EBITDA and 0.72 times sales. Limelight is the smallest company among the three, with only around $210 million in total market cap. At $2 per share, the market values Limelight at nearly 1.2 times sales. While it generated negative EBITDA over the past twelve months, the EV/EBITDA ratio is not valid.
Akamai seems to deserve the highest valuation, as it is the most profitable company. It has the highest operating margin at 24.4%, while the operating margin of Level 3 is only 10.3%. Limelight generated a negative operating margin of -21.6%.
The Foolish bottom line
With a debt-free operation, high profitability and a reasonable valuation, Akamai seems to be a good stock to hold in a long run. However, as Akamai is in the competitive Internet content acceleration industry, its future is not easy to predict. Personally, I would demand a lower stock price before initiating a long position in this stock.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!